India’s startups lacking guardian ‘angels’

This post originally appeared on the AFP newswire and has been picked up and published in multiple news outlets across the globe

by Staff Writers
Mumbai (AFP) May 8, 2013

It is seen as a land of entrepreneurs, economic growth and huge business potential, but India appears to be failing its promising startup companies which are struggling to find investors.

While there is no lack of ideas among the country’s vast young population, funding is declining from venture capitalists and rich “angel” investors, as they are known, who are often crucial to a young firm’s success.

“Risk-taking appetite from investors is low,” said Internet entrepreneur Nameet Potnis, who is trying to address the problem by setting up Nurtured.in, a platform to connect startups with early-stage investors.

“It is easy to set up an online business in India but very difficult to do business,” he told AFP.

Three decades after businessman N.R. Narayana Murthy and six other Indians sat around a kitchen table and formed leading IT outsourcer Infosys, the country is yet to create a favourable business environment for new entrepreneurs.

Just five percent of thousands of Indian startups get funds from sources external to friends and family, analysts say.

It is one of the toughest countries in the world for a startup to flourish, according to a 2012 report by US-based research firm Startup Genome.

Venture capitalists invested $1.09 billion through 222 deals in 2011, but this dropped by 30 percent to $762 million through 206 deals in 2012, according to researchers at Venture Intelligence, based in southern Chennai city.

The decline could not come at a worse time for the young Indian professionals and business graduates who are risking branching out on their own, after losing or quitting lucrative jobs amid the global downturn.

India’s own economic growth slowed to an estimated 5.0 percent for the fiscal year that ended March, its slowest rate in a decade, but that has not deterred many youngsters from trying to turn their ideas into businesses.

Some of India’s well-established startups include Nasdaq-listed online travel firm makemytrip.com, shopping website Flipkart and digital entertainment company Hungama.

In recent years, ventures have branched into areas as varied as pet care, gaming, restaurant guides and e-learning, and the startup bug is spreading into smaller Indian cities.

“More companies are coming up and not that much… money is being put in,” said Sampad Swain, an entrepreneur who founded “Instamojo”, which helps to sell digital downloads.

Jubin Mehta of Yourstory.in, an online site which tracks startups and entrepreneurs, said venture capitalists tend to look over 200 ideas before investing in one.

“Roughly 500 startups come up each month. And less than five percent — only about 25 — receive external funding,” he said.

Kulin Shah, an entrepreneur and former venture capitalist, said angel investors have become more demanding in the current economic climate, trying to avoid getting their money blocked in ventures for too long.

Angels are increasingly unwilling to fund firms that are clones of foreign startups or face intense competition, such as online car rentals, car pools and best-deal ventures, Shah said.

But too much caution can prevent investors spotting a hit, such as Nischal Shetty’s Twitter application “justunfollow”, which has more than three million registered users including 10,000 paid customers.

When he set it up three years ago, he generated revenues from day one despite a lack of enthusiasm from external investors.

“Angels asked me: how will you make money from this?” he said.

There are a few signs of hope for budding entrepreneurs.

In southern Kochi city, a massive glass-and-metal campus called “Startup village” is nurturing young engineers and aims to launch 1,000 Internet and mobile firms in 10 years.

Nasscom, an IT trade body, says startups are a “critical pillar” of the industry and last month launched “10,000 startups”, a programme which will shortlist and help fund as many ventures in the next 10 years.

“We have to create an environment where early-stage funding comes in,” Nasscom president Som Mittal said at the programme’s launch.

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Five Fundraising tips for start-ups

An assortment of United States coins, includin...
(Photo credit: Wikipedia)

Post adapted from

As an entrepreneur, scaling your business is both an exciting and difficult task. You have a great idea, a great team, and an interesting business model but moving from 5,000 customers to 500,000 and then five million is a complicated and capital-intensive process. For enterprises that aim to create social impact, an added component is that the product or service also serves to impact a social issue. How do you convince an investor that your business is the one to invest in? How do you learn the investor’s language so that your business is communicated as a viable and scalable prospect? Most importantly, how do find the investor best suited to your business?

Here are five tips to get the most out of your investor-entrepreneur relationship:

1. Understand Your Business Model Investors want to know that you know your business inside out. A great pitch comes from someone who doesn’t need to look at their PowerPoint. Being able to cite your financials from memory will really impress an investor and differentiate you from other promoters.  Providing a clear understanding of where you are now will convince an investor that you can accurately predict where your business is headed.

2. Identify the Relevant Investor With the mushrooming number of seed stage funds, impact investors, angel investors and venture philanthropists, in addition to mainstream venture capitalists and private equity funds, the investor landscape is becoming increasingly complex.  Find the right investor faster by knowing exactly what level of funding you require and what investors work in that bracket and what they are typically looking for. For example: high net worth individuals typically look for return on investment, while venture capital funds look for financial returns in addition to scalability and exit.

3. Accept That You Have Competition It is highly unlikely that your business model is unique and no one has ever thought of it. Chances are that investors have seen it or something like it before, considering they see hundreds of business models a year. What they are betting on, however, is a host of other factors that differentiate you from your competitors and your ability to leverage these. Therefore, don’t hide that there is competition, just prove that you can do it better.

4. Remember That Investors Want to Grow Your Business Investors are interested in investing in models that are scalable.  An asset-heavy model where a large percentage of invested capital is poured into infrastructure is far less attractive than an asset-light model where the product being invested in can be replicated without a long gestation period.

5. Go to Market When You Don’t Need the Money The best way to get an investment is to show the investor that your business will be fine without their money. Plan ahead. Start your investor outreach a year before you will actually need their investment. Don’t obsess over receiving investment, obsess about increasing your revenue. Investors will fund you the moment they feel that you will succeed without their money.

Read the original post at the Sankalp Forum Blog. The information in this post is based on workshops and lectures at the Sankalp Residential Bootcamp held at ISB Hyderabad. All rights reserved and Copywrite Sankalp Forum.

Funding a Start-up in India to be classified as Taxable income!

A recent clause in India’s 2012 Budget proposes taxing Indian start-ups 30% of the amount invested by Angel investors by terming the investment as income.

The Memorandum of the Finance Bill 2012 states
“It is proposed to insert a new clause in section 56(2). The new clause will apply where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares. In such a case if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income tax under the head “Income from other sources. However, this provision shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund.”

Where does this leave entrepreneurs who get Angel funding pretty early in the start-up life cycle when perhaps the only assets they have is a great idea on its way to execution?

In the Hindu Businessline, Mr Saurabh Srivastava, co-founder of Indian Angel Network, explains: “An angel investor may invest Rs 1 crore in a company that has no revenues and no profits and the tax official, unless otherwise ‘persuaded’, would tax the company at 30 per cent for no reason at all and convert an investment into income.”

Possible ways of working around this clause are suggested by Deepak Shenoy, who is a co-founder at MarketVision. He says, ” If you are a founder, you could use a sweat equity approach or use convertible debentures or since the law applies only to companies, you might be able to start a Limited Liability Partnership. Read his in-depth analysis here.

On a similar note, the U.S is mulling passing the “Entrepreneur Access to Capital Act,” (Pdf Link) which allows entrepreneurs to raise up to $2 million from individual investors without having to be approved by securities regulators. You can read more about this on his blog here.

I have rarely seen online petitions change anything in India, yet I am hopeful and have signed a petition. If you would like to do the same, you can do so at http://www.ipetitions.com/petition/no-startup-tax/

What do you think about the proposed law?